| An end to soft commissions "will not benefit pension funds" |
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| 19/10/2001 | ||
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by Nat Mankelow A report commissioned by the Fund Managers' Association (FMA), the representative body of the UK fund management industry, has claimed government-proposed changes to the way pension funds are charged will not improve the overall transparency of transaction fees. The London Business School (LBS) report said the all-inclusive fee structure recommended in the Myners review on institutional investment "would do little" to 'optimise' the trade-off between share trading costs and best execution. Attempts at improving transparency for pension fund fees - a central objective of the Myners review - could also be held back if the industry adopts an all-in-one pricing structure, said the report. The all-in-one pricing structure proposed by Myners recommends that fund managers should pay for the share transaction costs directly and then, if appropriate, levy a higher fee to pension fund clients. Myners' solution brings forth problems, not benefits - FMA The practice of soft commissions – where brokers contribute to fund managers' costs usually in the form of research in return for their business – has been strongly criticised by Myners, saying it lacked transparency and undermined fund managers' incentives to cut costs. Research has shown that the use of 'softs' can typically add 20-50 basis points to basic transaction fees paid by pension funds. And according to pension fund association NAPF, trustees often have little basis on which to establish whether they are getting value for money from the brokers. Whilst the report from the London Business School concluded that a shift to all-inclusive fees would encourage fund managers to monitor the level of commission payments, and eliminate unnecessary research costs, smaller fund managers could in fact be damaged by the move. All-inclusive fees would encourage fund managers to conduct more research and transactions in-house, argued the report, benefiting larger firms via economies of scale but potentially hindering smaller fund managers. The report added that if fund managers had to absorb transaction costs, they would invest less in brokerage services. Dialogue on transparency "is crucial" The FMA has generally been unhappy with the conclusions made by the Myners review, published in March. In the summer, it warned that an end to the practice of soft commissions would reduce UK fund managers' profitability and give overseas managers an advantage "since they would be operating under different rules." The association also says that the fund management industry is in poor shape and that the government "seems intent on making matters worse". All the UK-listed fund managers have sustained sharp share price falls over the past year. Schroders has fallen 35 per cent in the last 12 months, Aberdeen Asset Management 34 per cent and Amvescap 28 per cent. In contrast, the demand-side of institutional investment appears more content with Myners' verdict on transaction costs. NAPF welcomed the call for a revision of soft commission practices and the process of enabling pension funds to understand better how commissions are determined and spent. Paul Myners, head of Gartmore Fund Managers (a firm that keenly practices the use of soft commissions), said of the LBS report: "Pension fund fees is an area which wasn't receiving sufficient scrutiny in the past but should receive more in the future and FMA's views are a necessary part of ongoing discussions." The FMA is to draw up guidelines before the end of the year to improve transparency and accountability on the way its members charge clients for share transactions. And the government has given institutional investors two years to decide on measures to improve transparency and accountability over transaction costs, based on the findings of the Myners report.
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